Pacific Premier Bancorp Inc

Welcome to the Pacific Premier Bancorp second quarter 2021 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Steven Gardner, Chairman and CEO, please go ahead, sir.

Thank you, Chuck. Good morning, everyone. I appreciate you joining us today. As you are all aware, earlier this morning, we released our earnings report for the second quarter of 2021. We have also published an updated investor presentation that has additional information on our financial performance. If you have not done so already, we would encourage you to visit our investor relations website to download a copy of the presentation. In terms of our call today, I will walk through some of the notable items. Ron Nicklaus, our CFO, will review a few of the financial details, and then we'll open up the call to questions. I note that in our earnings release and in investor presentation, we have our safe harbor statement relative to the forward-looking comments. And I would encourage all of you to read through those carefully. We plan to keep our prepared comments relatively brief, given the level of detail and disclosures we've included in our earnings release and investor presentation. We had a very productive second quarter, both in terms of business development and implementing multiple initiatives that will further enhance our ability to drive profitable growth in the future. Our team executed at a high level throughout the quarter and is well positioned as we enter the back half of 2021. During the second quarter, we generated net income of $96.3 million, or $1.01 per share, which translated to a return on average assets of 1.90% and a return on average tangible common equity of 22.45%. Our profitability drove a 6.5% increase in tangible book value per share and allowed us to continue to return a meaningful amount of capital to our shareholders. Our results were driven by incremental improvement across the board relative to the prior quarter. A higher level of loan production and net loan growth that enabled us to start remixing the balance sheet towards higher yielding assets. increased contributions from most of our fee-generating areas, incremental improvement in our already strong asset quality ratios, which in part contributed to a material release of the reserve levels we had built last year, and well-controlled expenses. Our financial performance reflects the synergies emanating from a larger, more diverse and capable organization. It reflects our success in effectively leveraging the collective strengths of our teams throughout the bank. Our people are working in a collaborative fashion to expand existing relationships and add new clients, including larger, more sophisticated middle market companies and real estate investors, which is driving the growth we are seeing in our balance sheet. From our frontline business development personnel to credit administration and the onboarding of new clients, we are operating with a high level of proficiency in all areas, which is enabling us to efficiently generate quality growth. We have the strongest quarter in our history with nearly $1.6 billion in new loan commitments, which was up from $1.2 billion last quarter. while loan disbursements increased 54% over the prior quarter. This resulted in 14.5% annualized growth in total loans during the quarter, despite loan payoffs and paydowns increasing. The mix of loan production continues to be well diversified, with balanced contributions coming from across our markets. As we emerge from the pandemic, real estate related loan demand has been the first area to pick up. And relative to last quarter, we had a higher level of commercial real estate, multifamily, and construction loan commitment production. Commercial loan commitments remain healthy, reflective of our ever-improving capabilities to attract new small businesses, middle market, and corporate clients. During the second quarter, we began seeing a higher level of commercial line utilization rates compared to the historic lows at the end of the prior quarter, which helped drive an increase in our CNI portfolio. But it's too early to call this growth rate a sustainable trend. Our commercial clients still maintain significant liquidity levels, and coupled with the challenges of supply chain disruptions and the re-emerging concerns around the coronavirus, It may take time before we see a substantive increase in line utilization rates. Our loan production was weighted more towards the back half of the quarter, so we didn't realize the full benefit of net loan growth. The end of period loans were $383 million higher than our average loans. In addition to the higher level of loan production, our business development efforts continue to result in strong inflow of commercial deposits. In the second quarter, this resulted in a $466 million increase in non-interest-bearing deposits, which further improved our deposit mix and helped reduce our total cost of deposits to eight basis points. Looking ahead, we expect the trends in the second half of the year to be relatively consistent with what we saw in the first half of the year, depending upon the pace and sustainability of the economic expansion. We will continue to execute well on the things that we can control, and that includes our ongoing assessment of all parts of the company as we look for opportunities to improve. During the second quarter, given our strong liquidity and capital levels, we redeemed $25 million of subdebt, and at the beginning of July, we redeemed another $149 million of subdebt that we had acquired through various acquisitions. The elimination of these high-cost funding sources will reduce our interest expense and help support our net interest margin going forward. We are also trimming around the edges of our branch network and consolidated two more branches in July. As part of our disciplined approach to expense management, we regularly review our branch footprint to see where we can gain synergies and consolidate locations without negatively impacting client service. This is something we do on a regular basis. Our continuous focus on optimizing every area of our organization enables us to increase our investment in areas that help grow revenue, enhance efficiencies, and improve client service. With that, I'm going to go ahead and turn the call over to Ron to provide a few more details on our second quarter results.

Thanks, Steve, and good morning. The majority of my comments will be directed on a length quarter basis. Total revenue was $187.7 million for the quarter compared with $185.4 million in the prior quarter driven by higher non-interest income. Our efficiency ratio for the quarter was 49.4% and our pre-provision net revenue as a percent of assets was 1.84%, highlighting the benefit of our increased operating scale. During the quarter, we took a number of balance sheet actions, including growing our investment portfolio by approximately $600 million, increasing our BOLI investment by $150 million, and redeeming additional high costs of debt. I will touch on the benefit of these actions a bit more with my Q3 guidance. Our net interest margin came in at 3.44% for the quarter, and the core margin came in at 3.22%, a decrease of eight basis points from the prior quarter, as lowered loan yields and fees negatively impacted the margin, partially offset by a lower cost of funds. As noted, we believe the balance sheet actions taken, as well as the growth of our loans and deposits in the second quarter, will favorably impact net interest income and the margin in Q3. As a result, we see the core NIM in the 3.25 to 3.30% range. Non-interest income of $26.7 million increased $3 million compared with $23.7 million in the prior quarter. Key drivers of the increase included higher gain on the sale of SBA loans, a result of increasing SBA production, as well as higher trust and escrow related fees, as the latter saw increased transaction activity. Also, the additional $150 million BOLI investment will add a little more than $1 million per quarter to non-interest income starting in Q3. Non-interest expense, excluding merger related costs, came in at $94.5 million, compared with $92.5 million in the prior quarter. Higher incentive costs related to the higher level of loan and deposit production primarily drove the increase in compensation, as headcount was flat to the prior quarter at 1,521 employees. Our non-interest expense should approximate $94 to $96 million in Q3 as we continue to invest in both staff and technology, as well as experience higher levels of business activity costs related to growth. Provision expense was a recapture of $38.5 million compared with an expense of $2 million in the prior quarter. The recapture was driven principally by the improving macroeconomic forecast and key modeling variables, as well as our continued strong asset quality profile. Turning now to the balance sheet, total assets grew to $20.5 billion compared with $20.2 billion in the prior quarter, as deposits grew $275 million and equity just over $100 million. As highlighted earlier, we redeployed approximately $900 million of excess liquidity into higher yielding loans and investments, which combined grew by $1.1 billion from the prior quarter. In our earnings release, we included a loan roll forward table to provide greater transparency to the period end loan portfolio results and the primary drivers. As noted, Our total investment securities increased to $4.5 billion at quarter end. We saw strong inflows into our non-interest bearing deposits, which grew by over $450 million from the prior quarter, fueling total deposit growth to just over $17 billion. Year to date, we have redeemed a total of approximately $170 million in sub debt that had an average weighted cost of 5.5%. Asset quality continued to perform well with not performing assets at 17 basis points of total assets and total delinquency at 14 basis points of loans held for investment. Net charge-offs totaled $1.1 million for the quarter compared with $1.3 million in the prior quarter. Our allowance for credit losses finished the quarter at 1.71%, and the total loss absorbing capacity comprised of the allowance and the remaining fair value discount on acquired loans totaled $327 million at quarter end, or 2.39% of loans held for investment. Given our strong asset quality and the improving economy's impact on our CECL model, we are likely to see continued reserve releases in the coming quarters. With that, I'll hand it back to Steve.